The European Supervisory Authorities (EBA, EIOPA, ESMA, collectively ESAs) have published a proposed amendment[1] to the EMIR margin rules for OTC derivative contracts not cleared by a central counterparty (the EMIR Margin Rules)[2] with the aim of aligning the treatment of variation margin (VM) for OTC physically-settled foreign exchange forward transactions with the supervisory guidance in other key jurisdictions, in particular the US.

When the EMIR Margin Rules first came into force on 4th January 2017, they provided for, amongst other things, an obligation on counterparties to exchange VM for physical-settled foreign exchange forward transactions (FX Forwards), albeit with a deferred application until 3rd January 2018.

Now that the deferral date has passed and it has become clear that the EU was the only major regulatory jurisdiction now requiring even non-financial counterparties to fully margin their FX Forwards, the ESAs have proposed to amend the EMIR Margin Rules so that only those FX Forwards entered into between credit institutions and investment firms will be within scope of the VM requirements. They have also advised national regulators, until such time as the amended regulations come into force, to apply the EU framework to such transactions in "a risk-based and proportionate manner", signalling a degree of forbearance in their strict enforcement. To date, both the UK Financial Conduct Authority and Central Bank of Ireland have issued public statements stating that they will be applying forbearance.

The UK Financial Conduct Authority, have supported the proposal, stating:-

"The amendments to the RTS should become increasingly clear over time and we would expect firms to make their plans as a result. Although how they will be amended is not completely clear at this time, the proposals as outlined in the ESAs’ statement can be used by firms as an indication of what the amended requirements may look like. Accordingly, we will not require firms whose physically settled FX forwards are likely to be outside the scope of the amended requirements to continue putting processes in place to exchange variation margin. This approach is subject to any further statements that may be issued by the ESAs or the FCA. We, in any event, continue to recognise that the exchange of variation margin is a prudent risk management tool." FCA 7th December 2017[3]

The draft amendment is welcome news for those EU institutions trading physically-settled FX forwards in non-EU jurisdictions who might have, without this intervention, been at a disadvantage compared to their non-EU competitors in having to require an exchange of VM. Likewise non-financial EU entities with large physically-settled FX forward portfolios or those "financial" counterparties that are neither a credit institution or an investment firm, should be pleased by the development as, once the amendments come into force, they will have the ability to negotiate whatever prudent risk mitigation measures they are able to agree with their counterparties for such FX Forward transactions, without necessarily having to comply with the VM regime required under EMIR.

However, until such time as the amendment comes into force, parties should continue to seek guidance from the competent authority in their jurisdiction when assessing which EMIR risk management procedures to apply with respect to their physically settled FX forward transactions. It is anticipated that, due to the urgency in needing to avoid any negative impact on the EU FX forward market, this amendment will pass through the EU legislative process relatively smoothly.


The EMIR Margin Rules were based upon international standards finalised by BCBS-IOSCO[4] in 2015 to avoid the build up of systemic risk in the international derivative markets. Developments subsequent to the publication of the EMIR Margin Rules have resulted in the implementation of the BCBS-IOSCO framework by other jurisdictions with a more limited scope of application than the EMIR Margin Rules. In their proposal the ESAs acknowledge the importance of a level playing field in the international derivative markets. The amendment would revise the EMIR Margin Rules so that VM would only be exchanged on a mandatory basis for those transactions between "institutions" as defined in the Capital Requirements Regulation[5] or between institutions and counterparties established in a third country which would meet the definition of "institution" if it were established in the Union.

[1] See external link: physically-settled-FX-forwards-under-EMIR-.aspx
[2] See external links: Commission Delegated Regulation (EU) 2016/2251 of 4th October 2016 supplementing Regulation (EU) 648/2012 with regard to regulatory technical standards for riskmitigation techniques for OTC derivative contracts not cleared by a central counterparty
[3] See external link.
[4] See external link.
[5] See external link.

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